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The Housing Market – What’s Really Happening?

If you follow the sound bites in the media you would have reason to be confused. You hear about a soft-landing, a housing bubble, a shortage of condos, buy now before the spring bounce-back, a balanced market ….

The best way to make sense of the market – as seller, buyer or investor – is to pay more attention to the facts and less to the hype. Problem is … much of the information is either coming from vested interests with their own spin or is so macro you don’t know if it applies to you.

Let’s begin with last year. National average house prices boomed, boosted by rocketship Vancouver. This year you don’t hear much about the national average. So you may not know that detached homes in Vancouver have dropped 14.1% this year (see Plunge-O-Meter link at bottom). The happy buyer who snapped up the $900,000 “deal” in January must be a little sad that he didn’t wait and pay $800,000 instead. But, you never know.

My research on the Toronto Market

I’ve been keeping track of three areas since the start of the year: Markham, Richmond Hill, and North York (401 to Steeles, Vic Park to Dufferin). They represent a broad cross-section of growth and stability. A close-up of a few areas often provides more insight than gross averages. (I would need a research staff to track every area in the GTA!)

Further, rather than lumping townhouses, semis, and detached homes of all sizes all together, I focused on 4 bedroom houses with a family room and 2-car garages. For North York, where the majority of sales are older bungalows, any number of storeys and washrooms were included. For Markham and Richmond Hill, where builder developments are dominant, the graph shows 4 bedroom 2-storey homes with 3 washrooms.

I have been surprised that “traditional” North York is the price leader. That said, despite the November spike the price trend has a Vancouver look.

Markham maintained a flat to slight upward trend.

Richmond Hill would have been the same except for a November spike. I dug deeper into this data point for two reasons: (1) there were only 8 sales, the lowest of any month in any area; (2) the median time on the market was a whopping 44 days (average was 43), which would suggest lower prices, not higher.

As it turns out, 4 of the 8 homes were in ritzy higher-priced communities. Still, one homeowner offered bonus commission to get a buyer, and the average price discount among the 8 homes was $32,000.

Overall, prices in Markham and Richmond Hill are holding while North York is slipping. In contrast, detached homes across the entire GTA are down 6.4% since their April peak (see Plunge-O-Meter).

In my view the trend to watch is therising time to sell, distinctly getting longer, and historically a leading indicator of downward pressure on prices.

The views of objective analysts

Let’s look at what non-tied (to the real estate industry) analysts have been saying the past few weeks. To read more see the links at the bottom.

Ben Rabidoux of Hanson Advisors asks, “Will inflation keep boosting house prices?” A popular mantra is BUY (now!) and don’t worry about what you pay, because higher prices later will more than make up for the big mortgage payments, etc.

For sure? Yale economist Robert Shiller (the Shiller in the highly-regarded S&P Case-Shiller US housing index) charted US home prices back to 1890. Through the up and down periods – some spectacular – house prices would subsequently rise up or fall back to the inflation trendline. So, the higher they rise …. You know the story south of the border. Shiller sees Vancouver in a similar light to California, where prices are down 40-50% from peak levels.

Piet Eicholz of Maastricht University tracked home prices along an Amsterdam canal back to the 17th century. Same finding: above-inflation price rises would be followed by a drop back to the trendline.

Is the same going to happen in Toronto? If I knew the answer I would forget about e-Letters and get busy setting up my foundation. Still, if you are having thoughts about downsizing or cashing out, or wondering when to go house-hunting, you want to pay attention to the data.

A report by Pacifica Partners Capital in BC describes our resilient housing market as a product of the baby boom generation (mine, and yours?). Boomers aren’t buying any more, and younger generations don’t have the numbers or the purchasing power for today’s prices. I would add also there is a limit to Chinese money, which we are seeing in Vancouver. To Pacifica Partners, the fundamentals suggest housing is overvalued by 30%; other sources cite 10-25%. Their comment on young families looking to buy: “At this time, there's more risk going in than there is in holding out."

David Madani of Capital Economics in Toronto predicts a 25% drop in prices due to over-building. I would agree with that, but from a slightly different perspective. I see the downward price-pressure on houses more as collateral damage from the happening-now drop in condo prices (read my Condo blog for insights).

Housing bubble?

Since last year we have been hearing about 2 red flags of a housing bubble: high household debt and the lower cost of renting vs. owning. When a realtor says why rent when you can buy, what she means is rent = mortgage payment. Unfortunately, you also have to pay the $500 monthly maintenance and $3,000 annual property taxes. This is after you have cashed in $60,000 in mutual funds for the 20% downpayment, plus another $5,000 for transaction and start-up costs.

On household debt us Canadians have bragging rights! These charts are for mid-year. At the end of November household debt to disposable income was off the chart at 165% (see link below).

Among the advocates of a soft landing are Canadian banks. However, you have to take their views with a grain of salt. In November CIBC published a report, “No US-Style Crash for Canadian Housing”. Ben Rabidoux, analyst and strategist with M Hanson Advisors, responded with a 3-part commentary in which he reveals: “I've gotten to know a number of excellent analysts and economists who were or currently are employed by Canadian banks and who to varying degrees share my concerns over the housing situation in Canada. Each one has separately told me of specific incidences in which "bearish" reports they had written received backlash from upper management, or they were forced to remove portions of their reports before they would be circulated.” Real estate-related business is a major contributor to bank balance sheets and profits.

No one knows for sure where the real estate market is headed. At the same time, are we ever certain when we make important decisions? We do our homework, seek advice, use our best judgement, and move forward.

My recommendations

If you’ve already had thoughts about cashing out or downsizing, start planning. There are few reasons to think housing is going up over the next few years and many reasons to believe prices will go down. How much is 10% of your property value? How about 20%? The smart money in Vancouver is not waiting.

If you’re looking to trade up, do the math. (1) Get a market value assessment of your property. (2) Estimate your downpayment = net sales proceeds + any additional funds. (3) Size your new mortgage – use an on-line calculator or visit a mortgage broker (better!). (4) Set the target price of your next home = Downpayment + Mortgage. Allow for closing costs, moving expenses, and household purchases. Take your time, but start the process. While all price ranges are susceptible to decline, lower-priced homes tend to hold a bit better while higher priced homes become more negotiable.

If you’re renting, keep the faith and keep the lease going. The trend is your friend. Just don’t blow your growing downpayment. Enjoy thinking about what you can do with the $100,000+ in mortgage interest you’ll be saving.

If you’re happy right where you are and life is good regardless of the market, wonderful!

Ask me

My business has one purpose: to help you satisfyingly navigate the real estate market. In addition to excellent service, I’ll lower your costs whether you’re selling or buying. Ask me how.

If you own and want to know what properties like yours are going for, just ask me. After I do the research and give you the answer, I’ll leave you in peace. When you’re ready to talk, you know how to reach me.

Please share this blog with family members and friends (even strangers!). Got questions? Ask me.

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